CHAP 1

The Investment Environment

An investment is when you spend money today and expect to have benefits in the future.
REAL ASSETS VERSUS FINANCIAL ASSETS
Real Assets – contribute directly to GDP
- Determine the productive capacity and net income of the economy
- Examples: Land, buildings, machines, knowledge used to produce goods and services
Use different criteria like PI NPV,… to make an investment decision

Financial Assets – Claims on real assets

- Do not determine the productive capacity and net income of the economy ex: bonds, stock
- Three types:
1. Fixed income or debt sec (ck nợ) fixed stream of income or a stream of income determined by a specified
formula
 Payments are fixed or determined by a formula
 Money market debt: short-term, highly marketable, usually low credit risk (commercial paper, T-bill, CDs –
bank certìicates of deposit)
 Capital market debt: long term bonds, can be safe or risky (Gbonds, Gnotes, corporation bonds)
2. Common stock (ck vốn) is equity/ownership in payments to stockholders aren’t fixed but depend on the
success of the firm
3. Derivative securities (ck phái sinh) (options, future contracts)
- Value derives from prices of other securities, such as stocks and bonds – Used to transfer risk

FINANCIAL MARKETS AND THE ECONOMY

A financial market is a market in which ppl trade financial securities and derivatives
Information Role: Capital flows to companies with the best prospects
- When the market is more optimistic about the firm, its share price will rise. That higher price makes it easier for
the firm to raise capital and therefore encourages investment.
Consumption Timing: Use securities to store wealth and transfer consumption to the future
- When you are young, you earn much more than you spend, but when you are old, normally you spend more than
you earn. How to transfer consumption to the future, one way is to invest in financial assets. They will pay
income for you in the future. Therefore, the financial market could help you to store wealth.
Allocation of Risk: Investors can select securities consistent with their tastes for risk
Separation of Ownership and Management: With stability comes agency problems. Financial assets and the ability
to buy and sell those assets in financial markets allow for easy separation of ownership and management.
Corporate Governance and Corporate Ethics (đạ o đứ c)
 Accounting Scandals • Satyam (India), Olympus (Japan), Longtop Financial Technologies (China)
 Auditors – watchdogs of the firms • Arthur Andersen (Enron)
 Stock Analysts – optimistic research reports
 Sarbanes-Oxley Act • Tighten the rules of corporate governance
Commercial Banking - Take deposits and make loans

THE INVESTMENT PROCESS

An investor’s portfolio: collection of investment assets. Once the portfolio is established, it is updated or
“rebalanced” by selling existing securities to buy new securities, by investing additional funds to increase the
overall size of the portfolio, or by selling securities to decrease the size of the portfolio. Investors make two types of
decisions in constructing their portfolios.
Asset allocation: Choice among broad asset classes (stocks, bonds,….). How much of one’s portfolio to place in
safe assets versus in risky assets?
- Quyết định tỷ lệ invest cho y% risky portfolio và (1-y)% cho risk-free assets
- Trong đó tỷ lệ invest cho which class of risky portfolio – optimal risky portfolio (stocks, bonds, bđs,…)
Security selection/analysis: lựa chọn which bonds, sec nên mua
- Choice of which securities to hold within an asset class
- Security analysis to value securities and determine investment attractiveness
Đi theo thứ tự  top-down selection (more popular), ngược lại là follow bottom-up
"Top-down" portfolio construction: starts with asset allocation ⟹ decide what proportion of the overall portfolio
ought to be moved into stocks, bonds, and so on ⟹ establishing the broad features of the portfolio.
"Bottom-up" portfolio construction: starts with security selection

MARKETS ARE HIGHLY COMPETITIVE - no-free-lunch proposition

Risk-Return Trade-Off
- We should not expect to find a bargain in the financial market.
- higher expected returns - accepting higher investment risk. But, How should one measure the risk of an asset?
- What should be the quantitative trade-off between risk(properly measured) and expected return?

Efficient markets: a market in which prices always fully reflect all available information
- The stock prices respond quickly to new information. They are fairly priced at any given time.
Market price = intrinsic value. (không thể tìm được over/undervalue stock)
- The stock prices volatiles randomly without any possible anticipated techniques.
Depending on views of the efficient market, investors could choose between active and passive investment-
management strategies.
(i) Active Management (the market is not efficient) attempt to improve performance by finding mispriced
securities and timing the market
(ii) Passive Management (market is efficient): No attempt to find undervalued securities or time the market.
Holding a highly diversified portfolio without improving investment performance through security analysis.

Weak-form efficiency: Prices reflect all past market information, such as price and volume.
- If the market is weak-form efficient, investors cannot earn abnormal returns by trading on market information.
- Implies that technical analysis will not lead to abnormal returns.
- Empirical evidence indicates that markets are generally weak-form efficient.
Technical analysis does not exist
Semistrong-form efficiency: Prices reflect all publicly available information. Fundamental analysis does not work.
- including trading information, annual reports and press releases.
- If market is semistrong-form efficient, investors cannot earn abnormal returns by trading on public information.
- Implies that fundamental analysis will not lead to abnormal returns.
Strong-form efficiency: Prices reflect all information, including public and private. Insider trading will not work.
- investors could not earn abnormal returns, regardless of the information they possessed.
- Empirical evidence indicates that markets are NOT strong-form efficient and insiders can earn abnormal returns.

THE PLAYERS
(i) Firms: net borrowers/demanders of capital. They raise capital to pay for investments in plant and equipment.
(ii) Households - are net suppliers of capital. They purchase securities issued by firms that need to raise funds.
(iii) Governments - can be both borrowers and savers depending on the relationship between tax revenue and
government expenditures.
Financial Intermediaries: Pool and invest funds, developed to bring the suppliers of capital (investors) together with
the demanders of capital (primarily firms and the government). Included banks, investment companies, insurance
companies, and credit unions.
- distinguished from other businesses in that both their assets and their liabilities are overwhelmingly financial.
- Investment companies, which pool and manage the money of many investors, also arise out of economies of
scale
- Mutual funds: large-scale trading and portfolio management, investors are assigned a prorated share of the total
funds according to the size of their investment. This system gives small investors advantages they are willing to
pay for via a management fee to the mutual fund operator.
- hedge funds also pool and invest the money of many clients, open only to institutional investors such as pension
funds, endowment funds, or wealthy individuals, pursue complex and higher-risk strategies.
Investment Bankers: Underwrite new stock and bond issues, sell newly issued securities to the public in the primary
market, investors trade previously issued securities among themselves in the secondary markets
Venture Capital and Private Equity (vốn mạo hiểm)
- Venture capital (VC): the equity investment in young companies. Sources of venture capital are dedicated
venture capital funds, wealthy individuals known as angel investors, and institutions such as pension funds.
Most venture capital funds are set up as limited partnerships
- Collectively, these investments in firms that do not trade on public stock exchanges are known as private equity
investments.

MORTGAGE DERIVATIVES
Collateralized debt obligations (CDOs)
- Mortgage pool divided into slices or tranches to concentrate default risk
- Senior tranches: Lower risk, highest rating
- Junior tranches: High risk, low or junk rating
Problem: Ratings were wrong! Risk was much higher than anticipated, even for the senior tranches
Why was Credit Risk Underestimated? • No one expected the entire housing market to collapse all at once •
Geographic diversification did not reduce risk as much as anticipated • Agency problems with rating agencies •
Credit Default Swaps (CDS) did not reduce risk as anticipated
CREDIT DEFAULT SWAP (CDS)
- A CDS is an insurance contract against the default of the borrower
- Investors bought sub-prime loans and used CDS to insure their safety
- Some big swap issuers did not have enough capital to back their CDS when the market collapsed.
- Consequence: CDO insurance failed,
RISE OF SYSTEMIC RISK
Systemic Risk: a potential breakdown of the financial system in which problems in one market spill over and disrupt
others.
- One default may set off a chain of further defaults
- Waves of selling may occur in a downward spiral as asset prices drop
- Potential contagion from institution to institution, and from market to market
Banks had a mismatch between the maturity and liquidity of their assets and liabilities.
- Liabilities were short and liquid
- Assets were long and illiquid
- The constant need to refinance the asset portfolio
Banks were very highly leveraged, giving them almost no margin of safety.
Investors relied too much on “credit enhancement” through structured products like CDS
CDS traded mostly “over the counter”, so less transparent, no posted margin requirements
Opaque linkages between financial instruments and institutions
Systemic Risk and the Real Economy
- Add liquidity to reduce insolvency risk, break a vicious circle of valuation risk/counterparty risk/liquidity risk
- Increase transparency of structured products like CDS contracts
- Change incentives to discourage excessive risk-taking and to reduce agency problems at rating agencies

CHAP 2
ASSET CLASSES AND FINANCIAL INSTRUMENTS
collateral: tài sản thế chấp - asset that provides the backing for a loan vs mortgage type of loan use to finance the
purchase of a property.
THE MONEY MARKET
- The subsector of the fixed-income market: DEBT Securities are short-
term, liquid, low risk, and often have large denominations, highly
remarkable/
- Money market mutual funds allow individuals to access the money
market.
Table 2.1 Major Components of the Money Market

Money Market Securities

- Treasury bills: Short-term debt of U.S. government - the most marketable - 4, 13, 26, or 52 weeks
 Gov raises money by selling bills to public. Investors buy the bills at a discount
 Bid and asked price – Bank discount method
- Certificates of Deposit (or Fixed Deposit): Time deposit with a bank – chứng chỉ tiền gửi có kỳ hạn
- Commercial Paper (thương phiếu) Short-term, unsecured debt notes of company (most nonfinancial firms),
backed by bank line of credit. asset-backed commercial paper issued by financial firms
- Bankers’ Acceptances: (chấp phiếu ngân hàng) An order to a bank by a bank’s customer to pay a sum of money
on a future date
- Eurodollars: dollar-denominated time deposits in banks outside the U.S.
- Repos and Reverses: Short-term loans backed by government securities.
- Fed Funds: Very short-term loans between banks
- Brokers’ Calls: Individuals buy stocks on margin borrow part of funds, broker borrow funds from bank, agreeing
to repay bank immediately (on call) if the bank requests. The rate 1% higher than the rate on short-term T-bills.

The LIBOR Market

The London Interbank Offered Rate (LIBOR) – tỷ suất các bank cho nhau vay, dollardenominated loans, short-term
interest rate quoted in the European money market, same as EURIBOR (European Interbank Offered Rate)

Yields on Money Market Instruments

- Except for Treasury bills, money market securities are not free of default risk
- Both the premium on bank CDs and the TED spread have often become greater during periods of financial crisis
- During the credit crisis of 2008, the federal government offered insurance to money market mutual funds after
some funds experienced losses

THE BOND MARKET - longer-term borrowing or debt instruments fixed-income capital market, fixed stream of
income, or stream of income determined according to a specific formula.

Treasury Notes and Bonds

Maturities + Par Value trade - $1,000
- Notes – maturities up to 10 years + Interest paid semiannually – coupon payment
- Bonds – maturities from 10 to 30 years + Quotes – percentage of par

The yield to maturity (lợi suất đáo hạn) = 2 x semiannual yield - annual percentage rate (APR) - bond equivalent
yield.
The best place to start building an investment portfolio is at the least risky end of the spectrum
Inflation-Protected Treasury Bonds – trái phiếu kho bạc được bảo vê lạm phát
- TIPS (Treasury Inflation-Protected Securities).
Federal Agency Debt – Debt of mortgage-related agencies such as Fannie Mae and Freddie Mac
International Bonds – Eurobonds, Yankee bonds, Dim Sum bonds

MUNICIPAL BONDS (trái phiếu đô thị)

- Issued by state and local governments in the U.S để tài trợ chi phí cơ sở hạ tầng,….
- Interest is exempt from federal income tax and sometimes from state and local (miễn thuế thu nhập)
Types
o General obligation bonds: Backed by taxing power of issuer “full faith and credit”
o Revenue bonds: backed by the project’s revenues or by the municipal agency operating the project. (Issuers:
airports, hospitals, and turnpike or port authorities). Obviously, revenue bonds are riskier
o An industrial development bond: revenue bond issued to finance commercial enterprises  these private-
purpose bonds give the firm access to the municipality’s ability to borrow at tax-exempt rates,

Municipal Bond Yields

To choose between taxable and tax-exempt bonds, compare after-tax returns on each bond. Let t equal the investor’s
marginal tax bracket. Let r equal the before-tax return on the taxable bond and rm denote the municipal bond rate.
- If r(1 - t ) > rm then the taxable bond gives a higher return; otherwise, the municipal bond is preferred

The equivalent taxable yield is simply the tax-free rate, rm , divided by (1-t).

CORPORATE BONDS
- Issued by private firms to borrow money from public
- Semi-annual interest payments – coupon payment (annual payments in some countries)
- Subject to larger default risk than government securities
- Options in corporate bonds: Callable bonds: the option to repurchase the bond from the holder at a stipulated
call price. Convertible bonds option to convert each bond into a stipulated number of shares of stock

MORTGAGE-BACKED SECURITIES (chứng khoán đảm bảo bằng thế chấp

- Proportional ownership of a mortgage pool or a specified obligation secured by a pool
- Produced by securitizing mortgages: Mortgage-backed securities are called pass-throughs because the cash
flows produced by homeowners paying off their mortgages are passed through to investors.
- Most mortgage-backed securities were issued by Fannie Mae and Freddie Mac.
- Traditionally, pass-throughs were comprised of conforming mortgages, which met standards of creditworthiness.
- “Private-label” issuers securitized large amounts of subprime mortgages made to financially weak borrowers.
- Finally, Fannie and Freddie were allowed and even encouraged to buy subprime mortgage pools.

EQUITY SECURITIES
Common stock: (equity securities or equities): Ownership shares in corporation
- Residual claim: stockholders are the last in line of all those who have a claim on assets and income of firm
- Limited liability: most shareholders can lose in the event of failure of the corporation is their original investment
- common stock of most large corporations can be bought or sold freely on one or more stock exchanges
Preferred stock:
it promises to pay to its holder a fixed amount of income each year, same as infinite-maturity bond
Perpetuity – Fixed dividends – Priority over common – Tax treatment of dividends
American/Global Depository Receipts American Depository Receipts (ADRs) are certificates traded in U.S. markets
that represent ownership in shares of a foreign company. Each ADR may correspond to ownership of a fraction of a
foreign share, one share, or several shares of the foreign corporation. ADRs were created to make it easier for
foreign firms to satisfy U.S. security registration requirements.

STOCK MARKET INDEXES: Dow Jones Industrial Average

- Includes 30 large blue-chip corporations, Computed since 1896
- Price-weighted average
o Portfolio: Initial value $25 + $100 = $125  Final value $30 + $ 90 = $120
  Percentage change in portfolio value = 5/125 = -.04 = -4%
o Index: Initial index value (25+100)/2 = 62.5  Final index value (30 + 90)/2 = 60
 Percentage change in index -2.5/62.5 = -.04 = -4%

STANDARD & POOR’S INDEXES

- S&P 500 – Broadly based index of 500 firms – Market-value-weighted index
- Investors can base their portfolios on an index: – Buy an index mutual fund – Buy exchange-traded funds (ETFs)

Other Indexes
- U.S. Indexes: NYSE Composite • NASDAQ Composite • Wilshire 5000
- Foreign Indexes: Nikkei (Japan) • FTSE (U.K.;) • DAX (Germany), • Hang Seng (HK) • TSX (Canada)

DERIVATIVES MARKETS
- Options and futures provide payoffs that depend on the values of other assets such as commodity prices, bond
and stock prices, or market index values.
- A derivative is a security that gets its value from the values of another asset
Options (or Structured Warrants)
- Call: Right to buy underlying asset at the strike or exercise price. – Value of calls giảm as strike price increases
- Put: Right to sell underlying asset at the strike or exercise price. – Value of puts increase with strike price
- Value of both calls and puts increase with time until expiration.

Futures Contracts
- A futures contract calls for delivery of an asset (or in some cases, its cash value) at a specified delivery or
maturity date for an agreed-upon price, called the futures price, to be paid at contract maturity.
- Long position: Take delivery at maturity
- Short position: Make delivery at maturity
Option Futures Contract
- Right, but not obligation, to buy or sell; option is - Obliged to make or take delivery. Long position
exercised only when it is profitable must buy at the futures price, short position must
- Options must be purchased sell at futures price
- The premium is the price of the option itself. - Futures contracts are entered into without cost

1. Suppose your tax bracket is 30%. (a) Would you prefer to earn a 6% taxable return or a 4% tax-free return? (b)
What is the equivalent taxable yield of the 4% tax-free yield?
a) After-tax return = Before-tax return x (100 - Tax Rate) = 6% x 70%. Since the after tax yield of the taxable
investment is more we would prefer a 6% taxable yield.
b) Here, after tax yield = 4%. Tax Rate = 30  4% = Equivalent taxable yield x 70%  Equivalent taxable
yield = 5.7143%
2. What would be the profit or loss per share to an investor who bought the July 2012 expiration IBM call option
with an exercise price $180 if the stock price at the expiration date is $187? What about a purchaser of the put
option with the same exercise price and expiration? The option cost is $5.50 per share the investor's loss is the
cost of the put, or $2.11
The payoff to the call option is $7 per share at expiration.. The dollar profit is therefore $1.50.
Profit of purchaser of call option = (187 -180) – 5.5 = 1.5
Profit of purchaser of put option = -2.11
CHAPTER 3
HOW SECURITIES ARE TRADED
TRADING COSTS
Brokerage Commission: fee paid to a broker (môi giới) for making the transaction
- Explicit cost of trading – Full Service vs. Discount brokerage
Spread: Difference between the bid and asked prices - Implicit cost of trading

BUYING ON MARGIN (có 600 cần 1000 nên borrow – buy the stock (security company) on margin)
Higher interest rate than bank, bank yêu cầu chứng nhận nhiều thứ.
Khi mua chứng khoán, investor tiếp cận nguồn vốn vay broker’s call loan – buying on margin
Buying stock on margin (mua cổ phiếu kí quỹ) - borrowing part of the total purchase price of a position using a loan
from a broker. (broker’s call loan)
- The investor contributes the remaining portion. (other portion borrow from broker)
- Margin refers to the percentage or amount contributed by the investor.
Môi giới mượn tiền từ bank theo call money rate (lãi suất không kỳ hạn) để purchase sau đó charge khác khoản phí
này + service charge.
Percentage margin
Equity
Percentage margin=
Value of stock owed
- You profit when the stock appreciates.

Initial margin (tỉ lệ kí quỹ ban đầu) is set in the U.S. by Fed – thường 50% giá mua paid in cash, còn lại là mượn.
Maintenance margin (tỉ lệ kí quỹ duy trì)
o Minimum equity that must be kept in the margin account
o Margin call if value of securities falls too much
If the percentage margin falls below the maintenance level, the broker wil issue a margin call which requires the
investor to add new cash to the margin account. If the investor does not do anything, the broker may sell securities
from his or her account to pay off the loan to restore the maintenance margin.

EXAMPLE MARGIN TRADING: Initial Conditions Example 3.1

Initial Position (vị thế ban đầu)
Stock $10,000 Borrowed $4,000 (debt)
Equity $6,000 (your own money, need at least 60% on
hand).
%margin = 6000/10000= 60% > 30% - maintenance margin ⟹ nothing
happen

Maintenance Margin:
Stock price falls to $70 per share  New position:
Stock $7,000 Borrowed $4,000
Equity $3,000
Margin% = $3,000/$7,000 = 43% > 30%
If margin% < 30%, the company security company will call u to ask for more money added to your account. If no
they will have permission to pay off your stock

Margin Call: How far can the stock price fall before a margin call? Let maintenance margin = 30%
Equity = 100P - $4000
Percentage margin = (100P - $4,000) / 100P = 0.30
 Solve to find: P = $57.14
If the price of the stock were to fall below $57.14 per share, the investor would get a margin call

Why do investors buy securities on margin? They do so when they wish to invest an amount greater than their own
money allows. Thus, they can achieve greater upside potential, but they also have greater downside risk.
Rate of return = end-value – repayment
of
principal n interest – initial
invest
= (2600 – 10900) – 10000 /
10000 = 51%
Mượn nếu có lời thì lời nhiều nhưng lỗ thì cũng lỗ gấp đôi. Margin lending interest rates at securities firm are
currently from 12-14% and it is much higher than bank deposit rates (6-8%). VPS: 14%/year VNDIRECT:
13.5%/year SSI: 12%/year

Exercise 11: currently is selling at $40/share. buy 500 shares. The rate on the margin loan is 8%.:
initial margin
Stock $20,000 Borrowed $5,000
Equity $15,000
a. The percentage increase in the net worth of brokerage account if the price of Intel immediately changes to
immediately ⟹ no interest payment
(i) $44; Net worth = price x shares = 44 x 500 = 22000

 price ↗ 10%  Rate of return = 22000 – 5000 - 15000/ 15000 = 13,8%

(ii) $40; NW = 20000
 price change 0%  Rate of return = 20000 – 5000 - 15000/ 15000 = 0%
(iii) $36; NW = 18000

 price ↘ 10%  Rate of return = 18000 – 5000 - 15000/ 15000 = - 13,8%

relationship between percentage return and the percentage change in the price: rate of return change // price change

b. If the maintenance margin is 25%, how low can Intel’s price fall before you get a margin call?
The value of 500 shares is 500P.  Equity = 500P – 5000
Percentage margin = (500P - $5,000) / 500P = 25%  Solve to find: P = 13,33%

c. if you had financed the initial purchase with only $10,000 of your own money?
The value of the 500 shares is 500P. But now you have borrowed $10,000 instead of $5,000. Therefore, equity is
(500P - $10,000). You will receive a margin call when
Percentage margin = (500P - $10,000) / 500P = 25% when P = $26.67 or lower
With less equity in the account, you are far more vulnerable to a margin call.

d. What is the rate of return on your margined position if Intel is selling after 1 year, Intel pays no dividends
By the end of the year, the amount of the loan owed to the broker grows to: $5,000 × 1.08 = $5,400
The equity in your account is (500P - $5,400). Initial equity was $15,000. Therefore, your rate of return after one
year is as follows:
(i) (500 x44$) – 5400 – 15000 /15000 = 10.67%
(ii) (500 x40$) – 5400 – 15000 /15000 = 2.67%
(iii) (500 x36$) – 5400 – 15000 /15000 = -16%

e. How low can Intel’s price fall before you get a margin call?
The value of the 500 shares is 500P. Equity is (500P – $5,400). You will receive a margin call when: (500P –
5400)/500P = 0.25  P = 14.40 or lower

SHORT SALES (bán khống)

Normally, an investor would first buy a
stock and later sell it. With a short sale,
first, you sell and then you buy the shares.
In both cases, you begin and end with no
shares.
Purpose: investor to profit from a decline
in the price of a stock or security
Mechanics
- Borrow stock through a dealer
- Sell it and deposit proceeds and margin in an account (công ty yêu cầu có margin để cover loss)
- Closing out the position: buy the same stock and return to the party from which it was borrowed (covering the
short position vị thế bán)
ở short sales, Po > P1 (price decrease ⟹ có profit, increase ⟹ loss) nếu loss thì sec company require more money
in account to cover loss

covering the short position: An investor borrows a share of stock from a broker and sells it. Later, the short-seller
must purchase a share of the same stock in order to replace the share that was borrowed.

Short-sellers also are required to post margin with the broker to cover losses should the stock price rise during the
short sale Like investors who purchase stock on margin, a short-seller must be concerned about margin calls. If the
stock price rises, the margin in the account will fall; if margin falls to the maintenance level, the short-seller will
receive a margin call

Example 3.3 Initial Conditions

Dot Bomb 1000 Shares
50% Initial Margin
30%. Maintenance Margin
$100 Initial Price
Initial position:
Assets Liabilities
100.000 sales proceeds 100.000 buy shares
50.000 initial margin Equity 50.000
 Initial margin = 50,000 / 100,000 = 50%

**Vì asset vẫn là 150 nên share price giảm/tăng phải tăng/giảm equity**
Dot Bomb falls to $70 per share
Assets Liabilities
100.000 sales proceeds 70.000 buy shares
50.000 initial margin Equity 80.000
Profit = ending equity – beginning equity = decline in share price x number of shares sold short = 80k–50k=30k

Dot Bomb rise to $120 per share

Assets Liabilities
100.000 sales proceeds 120.000 buy shares
50.000 initial margin Equity 30.000
Loss = ending equity – beginning equity = decline in share price x number of shares sold short = 30k – 50k = 20k
Margin% = 30/120 = 25% <30% nếu không bỏ thêm sẽ có margin call

Margin Call How much can the stock price rise before a margin call?
($150,000* - 1000P) / (1000P) = 30% P = $115.38
*Initial margin plus sale proceeds
Exercise 10. Telecom and decide to sell short 100 shares at the current market price of $50 per share. a. How much
in cash or securities must you put into your brokerage account if the broker’s initial margin requirement is 50% of
the value of the short position? b. How high can the price of the stock go before you get a margin call if the
maintenance margin is 30% of the value of the short position?
100 shares, 50 per share
a. Initial margin 50% x 100 x 50$ = 2500
b. How much can the stock price rise before a margin call? Total assets are $7,500 ($5,000 from the sale of the
stock and $2,500 put up for margin). Liabilities are 100P. Therefore, equity is ($7,500 – 100P). A margin call
will be issued when: ($5,000 +2500 - 100P) / (100P) = 30% P = 57,69
 CHAPTER 4
Mutual Funds and Other Investment Companies
INVESTMENT COMPANIES
- Each investor has a claim to portfolio established by investment company in proportion to the amount invested.
- Pool funds of individual investors and invest in a wide range of securities or other assets.
Services provided:
- Record keeping and administration. issue periodic status reports, keeping track of capital gains distributions,
dividends, investments, and redemptions, and reinvest dividend and interest income for shareholders.
- Diversification and divisibility (đa dạng hoá và phân chia) enable investors to hold fractional shares of many
different securities, act as large investors even if any individual shareholder cannot.
- Professional management. support full-time staffs of security analysts and portfolio managers
- Lower transaction costs. trade large blocks of securities  achieve substantial savings on brokerage fees and
commissions.
Divide claims to those assets among those investors
Net asset value = (Market Value of Assets - Liabilities Shares) / Outstanding

TYPES OF INVESTMENT COMPANIES

Unit Investment Trusts (quỹ đầu tư uỷ thác)
công ty đầu tư của Mỹ phát hành danh mục chứng khoán cố định trong một thời gian xác định. Các quỹ đầu tư uỷ
thác được liên kết bởi nhà tài trợ và được bán cho nhà đầu tư thông qua các nhà môi giới chứng khoán.
- Fixed portfolio of uniform assets – Unmanaged
- Total assets have declined from $105 billion in 1990 to $29 billion in 2009
Managed Investment Companies (công ty quản lý đầu tư)
Đèu là thuê công ty quản lý danh mục đầu tư với phí 0,2 – 1.5% assets
- Open-End: (mutual fund) mua lại hoặc phát hành cổ phiếu theo NAV. The fund issues new shares when
investors buy in and redeems shares when investors cash out. Priced at Net Asset Value (NAV).
- Closed-End: no change in shares outstanding; old investors cash out by selling to new investors • Priced at
premium or discount to NAV (more premium than discount)
Other investment organizations: commingled funds, REITs, hedge funds, islamic investment funds, sovereign
wealth funds

MUTUAL FUNDS: OPEN-END INVESTMENT COMPANIES:

Investment Policies Each mutual fund has a specified investment policy, which is described in the fund’s prospectus,
money market mutual funds hold the short-term, low-risk instruments, bond funds hold fixed-income securities.
Some funds have even more narrowly defined mandates.
Money Market
These funds invest commercial paper, repurchase agreements, or certificates of deposit. Average maturity >1 month.
Money market funds usually offer checkwriting features, and net asset value is fixed at $1 per share, so that there
are no tax implications such as capital gains or losses associated with redemption of shares.
Equity Funds
- invest primarily in stock, also hold fixed-income or other types of securities, hold between 4% and 5% of total
assets in money market securities to provide the liquidity necessary to meet potential redemption of shares.
- Income funds tend to hold shares of firms with consistently high dividend yields.
- Growth funds are willing to forgo current income, focusing instead on prospects for capital gains.
Sector Funds concentrate on a particular industry. Other funds specialize in securities of particular countries.
Bond Funds specialize in the fixed-income sector.
- various concentrate on corporate bonds, Treasury bonds, mortgage-backed securities, or municipal bonds.
- some municipal bond funds invest only in bonds of a particular state to satisfy the investment desires of
residents of that state who wish to avoid local as well as federal taxes on interest income.
- specialize by maturity or by the credit risk of the issuer
International Funds invest in securities of firms located outside the United States. Regional funds concentrate on a
particular part of the world, and emerging market funds invest in companies of developing nations.
Balanced Funds hold both equities and fixed-income securities in relatively stable proportions.
- Life-cycle funds are balanced funds in which the asset mix can range from aggressive (primarily marketed to
younger investors) to conservative (directed at older investors).
- targeted-maturity funds gradually become more conservative as the investor ages.
Asset Allocation and Flexible Funds hold both stocks and bonds.
- asset allocation funds may dramatically vary the proportions allocated to each market in accord with the
portfolio manager’s forecast of the relative performance of each sector
Index Funds An index fund tries to match the performance of a broad market index. The fund buys shares in
securities included in a particular index in proportion to each security’s representation in that index.
How funds are sold
- Direct-marketed funds - Financial Supermarkets
- Sales force distributed: Revenue sharing on sales force distributed – Potential conflicts of interest

COSTS OF INVESTING IN MUTUAL FUNDS

Fee Structure: 4 types:
- Operating expenses: operating the portfolio, including administrative expenses and advisory fees paid to the
investment manager. %total assets under management, range from 0.2% to 2%.
- Front-end load: commission or sales charge paid when you purchase the shares. These charges pay the brokers
who sell the funds, not exceed 8.5%, (rarely higher than 6%). Low-load funds have loads that range up to 3% of
invested funds. No-load funds have no front-end sales charges. Loads reduce the amount of money invested.
- Back-end load: a redemption (khoản phí hoàn lại), or “exit,” fee incurred when you sell your shares. Typically,
funds that impose back-end loads start them at 5% or 6% and reduce them by 1 percentage point for every year
the funds are left invested. These charges are known more formally as “contingent deferred sales charges.”
- 12 b-1 charge (in the U.S.): use fund assets to pay for distribution costs such as advertising, promotional
literature including annual reports and prospectuses, and, most important, commissions paid to brokers who sell
the fund to investors.
- Fees must be disclosed in the prospectus
- Share classes with different fee combinations

Fees and Mutual Fund Returns: An Example

Initial NAV = $20
Income distributions of $.15
Capital gain distributions of $.05
Ending NAV = $20.10

LATE TRADING AND MARKET TIMING

- Late trading: accepting buy or sell orders after the market closes and NAV is determined
- Market timing: rapid in-and-out trading on stale net asset values
- Net effect is to transfer value from ordinary shareholders to privileged traders
- Mutual funds penalized for improper trading. New rules to prevent these practices \

TAXATION OF MUTUAL FUND INCOME

- Pass-through status under the tax code in most countries: taxes are paid only by the investor, fund investors do
not control the timing of the sales of securities from the portfolio
- High portfolio turnover leads to tax inefficiency

EXCHANGE TRADED FUNDS • Examples: “spiders”, “diamonds” and “cubes”

- Potential advantages: Trade continuously like stocks, Can be sold short or purchased on margin, Lower costs,
Tax efficient
- Potential disadvantages: Prices can depart by small amounts from NAV. Must be purchased from a broker

INFORMATION ON MUTUAL FUNDS • Fund’s prospectus describes: – investment objectives – Fund investment
adviser and portfolio manager – Fees and costs • Fund’s annual report
 CHAPTER 5
Introduction to Risk and Return
1. Risk and Return of single risky asset
2. Portfolio’s Risk and Return (chapter 7 – 7.2)
No free lunch opposition. Do not bargain, consider expected return and risk.

HOLDING PERIOD RETURN (realized return)

HPR = Holding Period Return (tỷ suất sinh lợi nắm giữ)
P0 = Beginning price P1 = Ending price D1 = Dividend during period one in cash
P1−P0 + D1 capital gain/loss
Single Period Example: Ending Price = 110. Beginning Price = 100. Dividend = 4
 HPR = (110 - 100 + 4 )/(100) = 14%
When dividends are received earlier, the HPR ignores reinvestment income between the receipt of the payment and
the end of the holding period. The percent return from dividends is called the dividend yield, and so dividend yield
plus the rate of capital gains equals HPR.

EXPECTED RETURN AND STANDARD DEVIATION

uncertainty about the price of a share plus dividend income  cannot be sure about your eventual HPR
Expected returns (forecasted/ average) of a single asset
E ( r )=∑ p ( s ) r ( s )
s

p(s) = probability of a state s r(s) = HPR in each scenario s

E(r) = expected or mean return
The expected rate of return is a probability-weighted average (tb xác xuất) of the rates of return in each scenario
Consider different scenarios that could happen
Scenario Returns:
E(r)=Sum of (r x prob) = (0.25)(0.31) + (.45)(.14) + (.25)(-.0675) + (0.05)
(-0.52) = 0.0976 or 9.76%
 If u invest today, your return on average could be +/- 9,76%
Để so sánh 2 stock, có thể tính cái diviation of min and max point của mỗi stock. Disavd: ignore the frequency – the
other point (tần số xuất hiện)
VARIANCE AND STANDARD DEVIATION
The standard deviation of the rate of return (s) is a measure of risk
It is defined as the square root of the variance, which in turn is the expected value of the squared deviations from the
expected return. The higher the volatility in outcomes, the higher will be the average value of these squared
deviations. Therefore, variance and standard deviation provide one measure of the uncertainty of outcomes.
Variance (VAR – phương sai): is the expected value of the squared deviations from the expected return.
σ =∑ p ( s ) x [r ( s )−E (r )]
2 2

Vì có thể deviation luôn dương nên phải mũ 2

Standard Deviation (STD) – sigma: the square root of the variance (higher STD higher risk – lower lower)
STD=s= √ σ 2
Example (ctd):
VAR calculation: σ 2 = 0.25(0.31 - 0.0976)2+ 0.45(0.14 - 0.0976)2 + 0.25(-0.0675 - 0.0976)2 + 0.05(-0.52 - .00976)2
= .038
STD calculation: √ σ 2=¿ 0.1949
As long as the probability distribution is more or less symmetric about the mean, s is a reasonable measure of risk.
In the special case where we can assume that the probability distribution is normal—represented by the well-known
bell-shaped curve— E ( r ) and s completely characterize the distribution.

difference the risk premium on common stocks: the reward as the difference between the expected HPR on the
index stock fund and the risk-free rate, (the rate you can earn by leaving money in risk-free assets)
Excess return: The difference in any particular period between the actual rate of return on a risky asset and the
actual risk-free rate. Therefore, the risk premium is the expected value of the excess return, and the standard
deviation of the excess return is a measure of its risk.
- risk averse: if risk premium were zero, they would not invest any money in stocks.

TIME SERIES ANALYSIS OF PAST RATES OF RETURN

The Arithmetic Average (trung bình cộng) of the rate of return:
When we use historical data, we treat each observation as an equally likely “scenario.” So if there are n
observations, we substitute equal probabilities of 1/n for each p(s)
n n
1
E(r)=∑ p( s)r (s )= ∑ r (s)
s =1 n s=1
If the time series of historical returns fairly represents the true underlying probability distribution, then the
arithmetic average return from a historical period provides a forecast of the investment’s expected future HPR.

Geometric Average Return (trung bình nhân): (Time-Weighted)

An intuitive (trực quan) measure of performance over the sample period is the (fixed) annual HPR that would
compound over the period to the same terminal (cuối) value as obtained from the sequence of actual returns in the
time series. Denote this rate by g, so that
TVn = (1 + r1) + (1 + r2)…. (1 + rn) = Terminal Value of the Investment
g = – TV1/n -1 = geometric average rate of return (the time-weighted average return)

If returns come from a normal distribution, the expected difference is exactly half the variance of the distribution,
E3(Geometric average) = E(Arithmetic averagen = ½s2

Standard Deviation Formulas

about risk - likelihood of deviations from the expected return. In practice, we cannot directly observe expectations,
so we estimate the variance by averaging squared deviations from our estimate of the expected

- Estimated Variance = expected value of squared deviations

Variance with historical data: (just an estimate)
n
1
σ 2= ∑ [r (s)−r ]2
n s=1
σ A= √ 12 σ M
r = average. σ A: có month muốn đổi thành year
- The variance estimate is biased (error). The reason is that we have taken deviations from the sample arithmetic
average, r, instead of the unknown, true expected value, E(r), and so have introduced an estimation error.
- When eliminating the bias, Variance, and Standard Deviation change to (to elimiate degrees of freedom bias)

n n
n 1 1
σ 2= x ∑ [r (s)−r ]2= ∑ [r (s)−r ]2
n−1 n s=1 n−1 s=1

√
n
1
σ= ∑ [r (s )−r ]2
n−1 s=1
Observation frequency has no impact on the accuracy of mean estimates. It is the duration of a sample time series
(as opposed to the number of observations) that improves accuracy
A longer sample will provide a more accurate estimate of the mean return than a short term return, provided the
probability distribution of returns remains unchanged over the long years.

THE REWARD-TO-VOLATILITY (SHARPE) RATIO

expected excess return: lợi nhuận có được vướt T-bill nếu chọn riskier portfolio
Risk-free asset = tài sản phi rủi ro có risk-free rate. trong thực tế ko tìm được asset no risk. Gvbond lowest risk
Excess Return (tỷ suất sinh lợi vượt trội) = Ri – rf
Risk premium = E(ri) – rf
Sharpe Ratio for Portfolios: = Risk Premium / SD of Excess Returns = E(r) – rf / sigma
Invest in stock with a higher Sharpe ratio, because it has a higher risk premium to cover  try to maximize Sharpe
ratio ⟹ maxium trade-off

Mean n standard deviation of HPR on stocks. E(r)= 14%

CHAPTER 6
Risk Aversion and Capital Allocation to Risky Assets
THE INVESTMENT DECISION (chap 7)
Top-down process with 3 steps:
1. Capital allocation © between the risky portfolio/asset (P) and risk-free asset (F)
2. Asset allocation in the risky portfolio across broad asset classes
3. Security selection of individual assets within each asset class
C – overall portfolio P – risky portfolio

ALLOCATION TO RISKY ASSETS

- Investors will avoid risk unless there is a reward.
- The utility model gives the optimal allocation between a risky portfolio and a risk-free asset.

RISK AND RISK AVERSION

Speculation
An individual might reject an investment that has a positive risk premium because the potential gain is insufficient
to make up for the risk involved
- Taking considerable risk for a commensurate (tương xứng) gain - a positive risk premium (an expected profit
greater than the risk-free alternative)
- Parties have heterogeneous expectations (kỳ vọng khác nhau)
Gamble (invest in stock có expected return = 0 – không thể cover risk)
- Bet or wager on an uncertain outcome for enjoyment. lack of “commensurate gain.
- Parties assign the same probabilities to the possible outcomes
- Risky investment with a risk premium of 0, called a fair game, amounts to a gamble
- A risk-averse investor will reject gamble
Investors are willing to consider: – risk-free assets – speculative positions with positive risk premiums
Portfolio attractiveness increases with expected return and decreases with risk.

Utility Function (giá trị hữu dụng)

U = utility E( r ) = expected return on the asset or portfolio
A = coefficient of risk aversion
σ 2 = variance of returns ½ = a scaling factor
higher exp.return higher utility value. Higher risk lower uv (lower scores for higher volatility)
Utility value refers to the total satisfaction that an investor receive from investing a security. Therefore, portfolio or
security with higher utility value will be more attractive.

Chọn A higher ER
- What happens when return
increases with risk?
Each portfolio receives a utility score
to assess the investor’s risk/return
trade off Nếu risk cao er cũng cao thì
so sánh utility
A = coefficient of risk aversion (hệ số e ngại rủi ro)
In economics n finance, risk aversion is the behavior of humans when an investor faces risk.
- If A =0, you are risk-neutral investors. (trung lập rủi ro – ignore risk) The level of risk is irrelevant to the risk-
neutral investor, meaning that there is no penalty for risk.
- If A >0 you are risk averse, (u dont like risk – only accept if risk very low) it generally means you don't like to
take risks, or you're comfortable taking only small risks.
- If A <0 you are a risk lover . You are happy to take risk.
Normally we are risk averse investors. When faced w 2 investments w a similar exp.return, we prefer the one w
lower risk.

Low A choose H, high A choose M

Mean-variance (m-v) criterion (expected return-risk)

Portfolio A dominates portfolio B if: E(r A )≥ E(r B ) - expected return and σ A ≤ σ B risk

Estimating Risk Aversion

 Use questionnaires  Observe individuals’ decisions when
confronted with risk  Observe how much people are willing to pay to
avoid
These equally preferred portfolios will lie in the mean–standard deviation
plane on a curve called the indifference curve, which connects all
portfolio points with the same utility value
Utility values of possible portfolios for investor with risk aversion, A = 4

(indifferent curve – đường bàng quan)

CAPITAL ALLOCATION ACROSS RISKY AND RISKFREE PORTFOLIOS
Asset Allocation: Controlling Risk:
- Is a very important part of portfolio construction. - Simplest way: Manipulate the fraction of the
- Refers to the choice among broad asset classes. portfolio invested in risk-free assets versus the
portion invested in the risky assets

BASIC ASSET ALLOCATION

Total Market Value $300,000
Risk-free money market fund $90,000
Total risk assets $210,000
- Equities $113,400
- Bonds (long-term) $96,600
Có 2 cách để nhận xét
- Trong C có y% P và (1-y)% F. trong P có ?% wE, ?%wD
- Trong C có ?% F, ?%Equity, ?%Bond
Let y = weight of the risky portfolio, P, in the complete portfolio; (1-y) = weight of risk-free assets:
wE = % E trong risk porfolio wB = %B trong risk porfolio

THE RISK-FREE ASSET

- Only the government can issue default-free bonds: risk-free in real terms only if price indexed and maturity
equal to the investor’s holding period.
- T-bills viewed as “the” risk-free asset
- Money market funds also considered risk-free in practice (bank certificates of deposit, commercial paper)

PORTFOLIOS OF ONE RISKY ASSET AND A RISK-FREE ASSET

the “technical” part of capital allocation: the feasible risk–return combinations
• It’s possible to create a complete portfolio by splitting investment funds between safe and risky assets.
- Let y=portion allocated to the risky portfolio (P), 1-y = portion to be invested in risk-free asset (F).
Example Using Chapter 6.4 Numbers
rf = risk-free rate = 7%  σ rf = 0% E(rp ) = 15%. σ p = 22% y = % in p (1-y) = % in rf
rP = risky rate of return = 15% - 7% = 8%
rate of return of complete portfolio: rC = yrP + (1 – y)rf
The expected return on the complete portfolio is the risk-free rate plus the
weight of P times the risk premium of P:

The risk of the complete portfolio is the weight of P times the risk of P:
(standard deviation)  y= σ C / σ p:
If σ C =0 %  E(rc) = rf.
If σ p=σ p  E(rc) = E(rp)
reward-to-volatility ratio or Sharpe ratio
The risk-free asset, F(x=0) appears on the vertical axis - standard deviation = zero. The risky asset, P(22,15)
standard deviation of 22%, and expected return of 15%
Capital allocation line (CAL): is a straight line originating at rf and going through the point labeled P shows all the
risk–return combinations available to investors
- The slope of the CAL (S) = increase in the expected return of the complete portfolio per unit of additional
standard deviation- in other words, incremental return per incremental risk = reward-to-volatility ratio
 Nếu
nằm trong khu vực y>1 (bên phải P) mượn nợ để đàu tư ⟹ tạo ra lợi nhuận cao hơn 100%. Thực tế không thể
mượn nợ ở F (y=0)

CAPITAL ALLOCATION LINE WITH LEVERAGE

Lend at rf=7% and borrow at rf=9%
- Lending range slope = 8/22 = 0.36
- Borrowing range slope = 6/22 = 0.27
CAL kinks at P
Figure 6.5 The Opportunity Set with Differential Borrowing and
Lending Rates

RISK TOLERANCE AND ASSET ALLOCATION

- The investor must choose one optimal portfolio, C, from the set
of feasible choices
- Expected return of the complete portfolio:

- Variance:

y= ? ⟹ Umax cho Uc’ = 0

y* depends on level of risk aversion, the level of risk, the risk premium

Active Management Passive Management

• Finding mispriced securities • No try to find undervalued securities
• Timing the market • No try to time the market
• Holding a highly diversified portfolio

PASSIVE STRATEGIES: THE CAPITAL MARKET LINE

- The passive strategy avoids any direct or indirect security analysis
- Supply and demand forces may make such a strategy a reasonable choice for many investors
- A natural candidate for a passively held risky asset would be a well-diversified portfolio of common stocks such
as the S&P 500.
- The capital market line (CML) is the capital allocation line formed from 1-month T-bills and a broad index of
common stocks (e.g. the S&P 500). Special case when P will be M khi danh mục rủi ro là danh mục thị trường
- The CML is given by a strategy that involves investment in two passive portfolios:
 1. virtually risk-free short-term T-bills (or a money market fund)
2. a fund of common stocks that mimics a broad market index
- From 1926 to 2009, the passive risky portfolio offered an average risk premium of 7.9% with a standard deviation
of 20.8%, resulting in a reward-to-volatility ratio of.

CHAPTER 7
Portfolio Risk and Return

Portfolio: danh mục. dễ hiểu chọn 2 loại D and E

DIVERSIFICATION AND PORTFOLIO RISK δ P −sigma P
We cannot calculate by weighted average (it is lower)  if u are holding a portfolio u can reduce risk.
Diversification strategy (chiến lược đa dạng hoá) You include additional securities in your portfolio, invest in many
securities. (Try to hold as many sec as u can)
There are two kinds of risk (all risks could be classified as 2)
- Market risk (Systematic or nondiversifiable): - (rủi ro thị trường, hệ thống, không thể đa dạnh hoá) is any risk
that affects a large number of securities. (covid)
o It comes from conditions in the general economy, such as the business cycle, inflation, interest rates, and
exchange rates.
o It can not be eliminated by diversification.
- Firm-specific risk (nonsystematic, unique, or diversifiable): (rủi ro có thể đa dạng hoá, độc nhất, phi hệ thống) is
a risk that specifically affects a single asset
o It can be eliminated by diversification
Cột y đại diện risk  If number of stock in the portfolio increase, nonsystematic risk decrease  Risk couldnt be
zero vì we cannot reduce market risk
Well-diversified portfolio: portfolio that has only market risk
Portfolio risk as a function of the number of stocks in the portfolio Panel A: All risk is firm-specific. Panel B: Some
risk is systematic, or marketwide

Portfolio diversification. The average standard

deviation of returns of portfolios composed of only
one stock was 49.2%. The average portfolio risk
fell rapidly as the number of stocks included in the
portfolio increased. In the limit, portfolio risk could
be reduced to only 19.2%

PORTFOLIOS OF TWO RISKY ASSETS

two mutual funds, a bond portfolio specializing in long-term debt securities, denoted D, and a stock fund that
specializes in equity securities
A proportion denoted by wD is invested in the bond fund, and 1- wD = wE , is invested in the stock fund. The rate
of return on this portfolio, rp , will be
rP = Portfolio Return = wD.rD + wE.rE
wD = Bond Weight rD = Bond Return.
wE = Equity Weight rE = Equity Return
The expected return on the portfolio is a weighted average of expected returns on the component securities with
portfolio proportions as weights. ER on portfolio calculated by weighted average.
The variance of the two-asset portfolio is:
variance of the portfolio, is not a weighted
average of the individual asset variances.

In words, the variance of the portfolio is a weighted sum of covariances, and each weight is the product of the
portfolio proportions of the pair of assets in the covariance term.
Portfolio risk depends on not only risk of each assets but also the correlation between the returns of the assets in the
portfolio. Covariance and the correlation coefficient provide a measure of the way returns of two assets vary

Covariance (Cov):
rD,E = Correlation coefficient of returns
D = Standard deviation of returns for Security
E = Standard deviation of returns for Security

If pDE = 1 

Correlation coefficient (p): u have to calculate the relationship bwt 2 assets

Range of values for p1,2: + 1.0 ≥ p ≥ -1.0
If r = 1.0, the securities are perfectly positively correlated
(tương quan cùng chiều hoàn toàn – nếu return on stock D tăng 3% return on
stock E tăng 3%) rất khó để tìm ra
If r = - 1.0, the securities are perfectly negatively correlated

TWO-SECURITY PORTFOLIO: RISK

Dùng ma trận hiệp phương sai. B1: vẽ 4 boxes
D(WD, D) E(WE, E)
D(WD, D) WD2 D2 WD D WE E p(D,E)
E(WE, E) WD D WE E p(D,E) WE2 E2

Another way to express variance of the portfolio:

p2 = WD2 D2 + WE2 E2 + 2.WD D WE E p(D,E)
= WD2 D2 + WE2 E2 + 2.WD WE cov(rD,rE)
Lower correlation lowers risk -1
D2 = Variance of Security D
E2 = Variance of Security E
cov(rD,rE) = Covariance of returns for Security D and Security E

Correlation Effects
- The amount of possible risk reduction through diversification depends on the correlation.
- The risk reduction potential increases as the correlation approaches -1.
o If p = +1.0, no risk reduction is possible.
o If p = 0, σP may be less than the standard deviation of
either component asset.
o If p = -1.0, a riskless hedge is possible.

Example Conduct optimal risky portfolio

E(rD) = 8% σ D = 12% E(rE) = 13%. σ E = 20% p(D,E) = 0,3 cov(D,E) = 72
¿ ¿ ¿
W D = ? W E= 1 - W D
E(rp) = wD.E(rD) + wE.E(rE) = (1 - wE).E(rD) + wE.E(rE)
p2 = WD2 D2 + WE2 E2 + 2.WD D WE E p(D,E)
p2 = (1 - wE).2 D2 + WE2 E2 + 2. (1 - wE). D WE E p(D,E)
- If wE = 0% ⟹ E(rp) = E(rD) (wD = 100%)
- If wE = 100% ⟹ E(rp) = E(rE) (wD = 0%)
deviation of the portfolio as a function of the portfolio
weights are:

The minimum variance portfolio

(danh mục phương sai tối thiểu) is
the portfolio composed of the risky
assets that have the smallest
standard deviation, the portfolio
with the least risk.

- If wE = 0% ⟹ σ P = σ D (wD = 100%)
- If wE = 100% ⟹ σ P = σ E (wD = 0%)
p = WD D + WE E
Calculate the minimum variance portfolio
' ¿
Đạo hàm (p)’= 0  W E min= 1 - W D

(D) wE = 0%, wD = 100% (E) wE =100%, wD = 0%

Để chọn ra optimal trong curve nhiều points, chọn 2 points để so
sánh. Chọn thử 1 điểm rồi tính CAL(…) ⟹ tìm F. so sánh các F
khi ở cùng 1 , F nào cao hơn chọn F đó. F cao nhất nằm ở
tendency line  tendency point là optimal portfolio. Tendency
line has highest slope. Đường tiếp xúc có hệ số góc lớn nhất

THE SHARPE RATIO (slope of CAL)

- Maximize the slope of the CAL for any possible
portfolio, P.
- The slope is also the Sharpe ratio. The objective
function is the
slope:

THREE-ASSET PORTFOLIO
 Nếu có N stock thì tính từng box then sum up. Portfolio risk could
not be zero.
If n ⟹ infinity then variance goes to cov  cannot = 0

MARKOWITZ PORTFOLIO SELECTION MODEL

The minimum-variance frontier (đường biên phân sai tối thiểu)
is the set of portfolios that offers the lowest risk for a given level of
expected return.
The efficient frontier (đường biên hiệu quả) is the set of optimal
portfolios that offers the highest expected return for a defined level
of risk or the lowest risk for a given level of expected return
All trong đó đều là optimal risky portfolio nhưng which is the best

Portfolio P is the tangency point of a line from F to the efficient

frontier. Portfolio P maximizes the Sharpe ratio, the slope of the
CAL from F to portfolios on the efficient frontier.
Everyone invests in P, regardless of their degree of risk aversion.
- More risk averse investors put more in the risk-free asset.

- - Less risk averse investors put

more in P.

ErF = 10%
ErG = 15%
WF = 0.3
WG = 0.7
a. The expected return of the portfolio is the sum of the weight of each asset times the expected return of each asset,
so: E(rp) = WFE(RF) + WGE(RG) = 0.3 x 0.1 + 0.7 x 0.15 = 0,135
b. The variance of a portfolio of two assets can be expressed as:

= 0.3^2 x 049^2 … = 0.23299

So, the standard deviation is: P = 48.3%

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